Lockheed Martin Corp. (ticker: LMT), the world’s biggest defense contractor, is improving its standing in the eyes of investors, even after what some analysts called a less-than-stellar quarterly earnings report.
The company is close to locking down a $9 billion acquisition of Sikorsky Aircraft, the 90-year-old maker of helicopters, and is reportedly planning to spin off or sell part of its government IT and services division, resulting in one of the sector’s largest companies. LMT stock should also benefit from the recently-approved $11.25 billion sale of four Freedom class Littoral combat warships to Saudi Arabia.
Lockheed last week has announced that it received $176.1 million in contracts from the U.S. Air Force for a sensor enhancement for sniper advanced targeting pods, completed the maiden flight of its F-16V Viper and was awarded an Air Force contract to update the branch’s Air Tasking Order Management Systems that controls air operations and coordinates air and ground operations.
“Lockheed’s been pretty consistent in terms of profits,” says Peter Skibitski, a senior equity analyst at Drexel Hamilton, a Philadelphia-based brokerage. “In this macro-environment, it’s a good, steady performer to which investors are attracted.”
Lockheed Martin sees sales improvements. Lockheed reported profit of $865 million for the quarter through Sept. 30, down from $888 million during the same quarter a year earlier. Still, revenue increased 3 percent to $11.5 billion, and 2016 sales are projected at about $45 billion, similar to this year.
The company’s earnings were given a lift by an 11 percent improvement in sales from its aeronautics division, which brought in $3.9 billion.
The increased earnings were directly attributed to robust sales of the F-35 stealth fighter, a version of that was recently declared by the U.S. Marine Corps as being ready for use.
The F-35 is touted as a replacement for several U.S. Air Force, Navy and Marine aircraft, including the F-16, F/A-18 and AV-8B Harrier.
Lockheed likely will lean on the F-35 project, which remains both a “focus and risk” for the both the government and the company, according to Robert Stallard, an aerospace analyst for RBC Capital Markets in New York, in a recent research report.
“With spending pressures and technical challenges, there have been some rocky periods on the program,” Stallard says. “Although relations between the (Department of Defense and Lockheed Martin) are stable, this major program remains a focus and risk for the department and for investors.”
The project has proved to be a boon for the company, which Stallard calls a “bellwether” for the industry, but last week’s election in Canada may be a thorn in Lockheed’s side.
Liberal Justin Trudeau was elected as prime minister, and while that may mean good things for many industries in Canada, it’s not good for defense. Trudeau said in September that he would scrap a planned purchase of F-35s, and instead find cheaper alternatives such as CF-18s, according to the Canadian Broadcasting Corp.
Still, the F-35 has improved the company’s bottom line, and that’s something that likely won’t change as it continues to see gains in its aeronautics division.
The Sikorsky purchase should help LMT stock. Lockheed also branched into the world of mergers and acquisitions on July 20 when it entered into an agreement to acquire Sikorsky from United Technologies Corp. (UTX) for $9 billion. After tax benefits, the price will effectively be just over $7 billion, the company said when it announced the deal.
Lockheed Martin believes that the helicopter company will complement its portfolio of aerospace defense products. Sikorsky will fall under Lockheed’s Mission Systems and Training business segment.
The purchase, which is expected to be completed by the end of the year, likely won’t have an effect on the company’s performance for the next three to four quarters, Drexel Hamilton’s Skibitski says.
Spinning off the IT division. Along with the F-35 and its purchase of Sikorsky Aircraft, Lockheed also is considering spinning off or merging some of its information technology and services businesses, which are valued at about $4 billion, Reuters reports.
The company is considering partnering with a separate government services contract, according to the news company. Suitors include Science Applications International Corp. (SAIC) and CACI International (CACI).
The merger would potentially generate about $2 billion in cash for Lockheed, which could help offset some of the debt it acquires when the Sikorsky deal is finished.
LMT stock has a solid outlook. Between the Sikorsky deal, its plan to spin off or sell part of its IT and services division and the several new contracts the company has announced in the past week, analysts generally see Lockheed Martin as, at the very least, a solid company that has a bright future.
With defense budgets potentially improving moving forward, Drexel Hamilton’s Skibitski says he has high expectations for Lockheed Martin for at least the next few years. The Sikorsky deal and the longer-term contracts the company’s signed should be a good sign for investors.
“Defense budgets are expected to get better which will help, and international orders are strong,” he says. “Most of the 2016 outlook is already in their backlog, and the new stuff is two years out in terms of generating revenue. That should make investors feel comfortable that things are well in hand. (Lockheed) has a pretty solid outlook.”
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Lockheed Martin Stock is a Strong Buy originally appeared on usnews.com
